Abstract:

This paper brings together two separate and important topics in finance: the predictability of
aggregated stock returns and the intertemporal asset pricing models. We present empirical
evidence about the predictability of stock returns with a sample of OECD economies and
investigate whether such evidence is consistent with a simple general equilibrium model. Our
framework allow us to formalize the extensively documented empirical relationship between asset
returns and real activity. The principal parameters in this relationship are the relative risk aversion
and the elasticity of intertemporal substitution for the first moment of the returns and only the
elasticity of substitution for the second moments. Except for the United States annual case, the
puzzle of volatility remains in our model.